Quarterly Review-October 2019

Visit the new Lucas Capital Website

During September we launched our new website.  If you haven’t already had a chance to see it, please do.  It’s easy to navigate and highlights key aspects of Lucas Capital.  As our business continues to grow, we needed to update our website to provide information to potential clients who have not worked with us.  We feel honored with our existing clients and strive to always provide the best service we can.  The goal of our new website is to give you more detail on the services we provide and the experience of being a Lucas Capital client.  We are also offering a free e-book, Financial Planning for Successful People, which can be downloaded on the site.

Please let us know what you think of the new site. Also, if you know of any family members or friends who would benefit from working with us, we would be thankful for the recommendation.

Fidelity Eliminates Trading Fees for Stocks and ETFs

While Lucas Capital is your advisor, your assets are held with Fidelity Investments, acting as custodian.   Fidelity recently announced that they are eliminating trading fees for buying or selling stocks, ETFs or options for clients who are on electronic delivery.  If you are still receiving paper statements, we encourage you to switch to electronic delivery to take advantage of the lower trading fees.

Stocks Flat, Interest Rates Continue to Decline

During the 3rd quarter the stock market inched higher with the S&P 500 gaining 1.7%1. The bigger move was in the bond market where the 10-year Treasury rate declined from 2.00% to 1.68%.  This continued a trend of lower rates that began November 2018 when the 10-year was at 3.20%2.  On a percentage point basis neither move seems all that significant.  Small changes in interest rate equate to big changes in interest earned when rates are low.  For example, if you owned $100,000 of 10-year Treasury Bonds bought on November 6, 2018, you would be receiving a 3.20% coupon or $3,200 per year in interest.  Buying similar 10-year Treasuries at the end of the 3rd quarter would give you a 1.68% coupon, with $100,000 of bonds paying only $1,680 per year in interest.   The difference between earning $3,200 per year or $1,680 per year is meaningful.  The 1.5% drop in interest rates from November to now reduced the interest income by 47%!  Even at lower rates, bonds are an important component of a balanced portfolio environment, we are pleased to own the longer-term bonds that we have purchased over the past few years and new purchases will tend to be on the shorter end of the yield curve.

The Economy Continues to Show Some Signs of Weakness

In our July letter, we cautioned that metrics on the economy are starting to point downward and the trend continues:

  • Job Growth is slowing with non-farm payrolls on pace for the slowest annual growth since 2010.  For the period 2011 to 2018, the US economy generated 202,000 new jobs. The average for 2019 is 161,000 new jobs per month.  On the positive side, unemployment remains at historically low level of 3.5%3.
  • The ISM Purchasing Managers Index (PMI) for manufacturing came in at 47.8 in September, the lowest level since 2009.  The Service sector was also weak with the PMI for services down to 52.6 in September from 56.4 in August.  The Institute for Supply Management, that compiles the survey, said the weakness is due to a “continued decrease in business confidence due to concerns of global trade and slower export orders.”4

Though we are starting to see “cracks” in the business community, the consumer is in good shape with consumer sentiment positive and consumer spending on the rise.  With consumption representing 70% of the U.S. economy, a strong consumer drives growth.  In 2018 US GDP grew 2.9% with the 2Q 2019 at 2.0%5. It’s slow growth….but still growing and continuing the record period of economic expansion.  Our view is that the consumer will be the last link in the chain that will lead to recession.  Consumers will continue to spend until they fear losing their job or are out of work.  Even though the consumer is currently in good shape, we are keeping our eye on signs of employer weakness, like the ISM numbers.  If business spending declines, at some point companies will lay off workers, leading to less money in consumer’s pockets, lowering spending and slowing economy.  Right now the consumer is still confident and spending because they have jobs.  Our concern is further up the chain of events where we are seeing weakness in the companies that are providing the jobs.

We continue to believe that we are in the late innings of the longest economic expansion in US history, now at 122 months.   Though it’s record breaking in length, it’s also one of the slowest recoveries with the cumulative growth over the past 10 years at 25%6.  Previous expansions have given us much faster economic growth before petering out.  However, because of the slow pace, we could continue in a period of very slow growth, low inflation, low interest rates for the next few years.

What To Do?

With this as a backdrop we believe that you should:

  1. Stay balanced in your portfolio allocation. Once you have your allocation set based on your life goals, be cautious about trying to time the next stock market sell off.  If you think that your current allocation is giving you more risk than is appropriate, give us a call and we can discuss getting to the right balance.
  2. Don’t give up on bonds just because rates are low. Bonds are non-correlated to stocks and provide stability in your portfolio.  With current long term rates near historic lows, we will tend to favor shorter maturity bonds.
  3. Expect Volatility. The markets are reacting to daily headlines and particularly sensitive to the trade dispute with China.  The political wrangling in Washington can also be disturbing to markets.  This is likely to continue through the presidential election.
  4. Plan for the long run. Amid the turmoil, your life goals should remain of primary importance.  Markets will go up and down and politicians will continue to fight with each other.  Stick with your long-term plan.  If you still need to develop one, please give us a call and we can help.

We value the relationship that we have with each of our clients.  Please let us know how we can be of further help to you, family members or your friends.

 

Sources:

  1. JP Morgan Asset Management https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the markets/viewer?slide=1383275330026
  2. Federal Reserve Bank of St. Louis Economic Research.  https://fred.stlouisfed.org/series/DGS1
  3. Bureau of Labor Statistics. https://www.bls.gov/news.release/empsit.nr0.htm and https://data.bls.gov/cgi-bin/surveymost
  4. Institute for Supply Management https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm?SSO=1
  5. Bureau of Economic Analysis https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey
  6. CNBC https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html

NOTE:  This report has been prepared for the discretionary account clients of Lucas Capital Management LLC (LCM) only and is not intended for the general public.  The intention of this material is to provide the basis for investment decisions made by LCM on your behalf.  The opinions expressed in this report are those of Lucas Capital Management.  Information contained herein is based on sources we believe to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed.  Any opinions are subject to change without notice.  This report is for informational purposes only and is not intended as an offer to sell or a solicitation to buy securities.  This report may not be reproduced or distributed without our permission and is a service provided exclusively for our clients.  Lucas Capital Management and its affiliated companies and/or associated persons may, from time to time, have positions in, or options on the securities discussed herein and may make purchases/sales while this report is in circulation.  More information is available upon request.